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Sharing the Wealth: When Should Firms Treat Customers as Partners?

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  • Eric T. Anderson

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    (Graduate School of Business, University of Chicago, 1101 E. 58th Street, Chicago, Illinois 60637)

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    Abstract

    Marketers often stress the importance of treating customers as partners. A fundamental premise of this perspective is that all parties can be weakly better off if they work together to increase joint surplus and reach Pareto-efficient agreements. For marketing managers, this implies organizing marketing activities in a manner that maximizes total surplus. This logic is theoretically sound when agreements between partners are limitless and costless. In most consumer marketing contexts (business-to-consumer), this is typically not true. The question I ask is should one still expect firms to partner with consumers and reach Pareto-efficient agreements? In this paper, I use the example of a firm's choice of product configuration to demonstrate two effects. First, I show that a firm may configure a product in a manner that reduces total surplus but increases firm profits. Second, one might conjecture that increased competition would eliminate this effect, but I show that in a duopoly firm profits may be increasing in the cost of product completion. This second result suggests that firms may prefer to remain inefficient and/or stifie innovations. Both results violate a fundamental premise of partnering---that firms and consumers should work together to increase total surplus and reach Pareto-efficient agreements. The model illustrates that Pareto-efficient agreements are less likely to occur if negotiation with individual partners is infeasible or costly, such as in business-to--consumer contexts. Consumer marketers in one-to- many marketing environments should be wary of treating customers as partners because Pareto--efficient agreements may not be optimal for their firm.

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    File URL: http://dx.doi.org/10.1287/mnsc.48.8.955.170
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 48 (2002)
    Issue (Month): 8 (August)
    Pages: 955-971

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    Handle: RePEc:inm:ormnsc:v:48:y:2002:i:8:p:955-971

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    Related research

    Keywords: partnering; customer relationship management; efficiency; contracting; pareto-efficiency; coase theorem;

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    Cited by:
    1. (Bill) Tseng, Tzu-Liang & Huang, Chun-Che, 2007. "Rough set-based approach to feature selection in customer relationship management," Omega, Elsevier, vol. 35(4), pages 365-383, August.
    2. PETE Stefan & CARDOS Ildiko Reka, 2010. "A Managerial And Cost Accounting Approach Of Customer Profitability Analysis," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(1), pages 570-576, July.

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